A variety of laws regulate the banking industry and in particular how banks handle check payments versus electronic payments or fund transfers.
A well-known law for processing checks in the United States is known as the Check Clearing for the 21st Century Action (popularly referred to as “Check 21.”) A recipient of a paper check is permitted to create a digital version of the original check (referred to as “check truncation.”) The new electronic image is called a “substitute check.” This has largely been a success because the physical handling, managing, and storing of a huge volume of checks that banks are forced to process have almost entirely been eliminated. Now, consumers, banks, and businesses that receive checks can capture images of those checks and process check payments electronically using those images.
Different rules and regulations apply to electronic fund transfers. Regulation CC associated with the Expedited Funds Availability Action (EFA or EFAA) regulates how long banks can hold certain electronic fund payments.
Because banking has steadily been moving to electronic transactions, vendors that handle electronic check images and physical checks on behalf of banks have been in search of a mechanism to provide a better way to gain traction with a traditional check, which could be processed using existing Check 21 infrastructure but utilize Regulation CC.
At present Check 21 relies on an image of a physical check, such that the check processing squarely falls within the purview of the laws are regulations associated with Check 21. But, as stated the use and popularity of physical checks are in steady decline within the industry.